Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Investors shun ailing US dollar
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: October 11 2010 03:45 | Last updated: October 14 2010 18:05
http://www.ft.com/cms/s/0/6bb787d2-d4db-11df-b230-00144feabdc0.html


Thursday 18:00 BST. The impact of mooted Fed intervention continues to batter the dollar, distorting markets and scattering assets to extremes.

Gold has hit a new nominal peak, the Aussie dollar is near parity with its US namesake, which is also at 15-year lows versus the yen. Commodities from copper to corn are at cyclical highs, while short-term core bond yields remain near record lows.

The FTSE All-World index is up 0.5 per cent to 210.3, its best level since September 2008.

The benchmark has climbed by 14 per cent in six weeks – a period in which traders’ risk appetite has risen with every hint that the US Federal Reserve stands ready to inject further liquidity into the economy via the purchase of financial assets.

However, risky assets are struggling to make headway. Commodities are now down for the session after rising earlier to fresh highs. Wall Street’s S&P 500 index is off 0.6 per cent, though mostly battered by financial groups on fears that the ongoing mortgage mess could spark big new losses.

A worse-than-forecast reading of weekly initial jobless claims seems to have reminded traders that the Fed’s proposed largesse comes only as a result of fundamental economic weakness.

Factors to Watch. Google provides the main US earnings interest on Thursday, but it will report after the closing bell.

The Market Eye

The Fed’s strategy, which will be the second batch of quantitative easing, and is therefore known as QE2, is the primary cause of the dollar’s 7 per cent fall over the past month, writes Jamie Chisholm.

And from the dollar’s decline traders have been following a well-thumbed bullish strategy map: the weak greenback boosts dollar-denominated commodities and helps US corporates, 50 per cent of whose earnings are made abroad.

The trick for investors is to work out how much of QE2 is now factored into the market, or whether recent gains in riskier assets can be justified by the fundamentals.

The early positive noises from the US third-quarter earnings season may go some way to justifying recent optimism, but can such profits be maintained when the underlying economic data remains so tepid?

Also, global investors seem to be so in thrall to Wall Street’s moves that they are blinded to the fact that a rising S&P 500 based on dollar weakness is an advance built on US companies eating their international competitors’ lunch.

In addition, the dollar’s tumble is wrenching the globalisation consensus. The “currency war” is again rumbling.

A dispute between South Korea and Japan over exchange rates intensified on Thursday as Seoul complained to Tokyo after the neighbouring country questioned its leadership of the G20 meeting, citing Seoul’s repeated intervention to curb the won’s strength.

Now UN peackeepers are attempting to intervene. James Zhan, a senior official at the United Nations Conference on Trade and Development has warned that the race to devalue currencies is deterring companies from investing abroad, Reuters reported.

Europe. Bourses opened higher as the falling dollar saw traders flick the “risk on” switch. However, a pull back in US equity futures following the jobless data has seen benchmarks pull back. The FTSE Eurofirst 300 is down 0.2 per cent as defensives see selling.

London’s FTSE 100 was down 0.4 per cent, dragged back by a relapse for the banking sector as investors worry that some may have to follow Standard Chartered and come to the market for cash to bolster their balance sheets.

Forex. Asian currencies are making waves with record highs, led by Singapore’s surprise decision to widen its currency band. The Singapore dollar was up 0.5 per cent to S$1.2958, after hitting S$1.2893, the highest level since 1981. The move is widely seen as having kick-started the day’s renewed broader dollar selling.

The Australian dollar is also nearing parity, up 0.2 per cent to a fresh 28-year of $0.9926 as traders contrast the differing economic fortunes of the US and down under.

The yen hit a fresh 15-year high of Y80.90 against the dollar despite investor wariness over possible intervention. It is now up 0.4 per cent at Y81.43.

The Chinese renminbi is up 0.2 per cent to Rmb6.6505 per dollar, the highest level since Beijing abandoned a decade-old peg to the greenback in July 2005, amid growing global tensions over currencies.

The Korean won rose towards a five-month high against the dollar on expectations of higher interest rates but the Bank of Korea left interest rates unchanged at 2.25 per cent.

The US dollar index, which tracks the buck against a basket of its peers, is down 0.6 per cent to 76.63, having earlier dredged a 10-month trough of 76.26. The euro is up 0.7 per cent to $1.4057.

Rates. US Treasuries are softer ahead of the final auction for this week later on Thursday – the sale of $13bn worth of 30-year notes. However, yields remain near recent troughs as investors continue to price in the purchase of debt as part of the Fed’s mooted QE2 programme.

The US 10-year note yield is up 3 basis points at 2.45 per cent, while two-year yields are up 1 basis point at 0.37 per cent, a few basis points off record lows.

News that factory gate inflation in the US is running at a faster pace than expected appears to have had little significant early impact, as investors assume that companies would have great difficulty forcing such price pressures on to consumers.

Commodities. Industrial metals are trundling lower, not helped by the weaker dollar or possible increased demand from investment funds, instead seeming to take their cues from the poor economic data. Copper is down 0.2 per cent to $3.78 a pound in Nymex trading, off a 27-month high touched earlier.

Oil is down 0.2 per cent to $82.82 a barrel, while gold has hit a new high of $1,387.1 an ounce for the first time and is currently up 0.2 per cent at $1,374. Silver touched a fresh 30-year high of $24.90 an ounce, and is now trading at $24.45.

Asia-Pacific. Shares hit their highest level since July 2008 amid improving investor confidence on the back of strong corporate earnings data and on hopes QE2 will lift all boats. The FTSE Asia-Pacific Index is up 1.9 per cent.

Japan’s Nikkei 225 Stock Average has dismissed a sharp move higher for the dollar/yen and has gained 1.9 per cent. South Korea’s Kospi Composite has advanced 1.3 per cent. Australia’s S&P/ASX 200 index is up 1.7 per cent and New Zealand’s NZX 50 index has gained 0.9 per cent.

Shanghai added 0.6 per cent and Hong Kong rose 1.7 per cent to a 28-month peak as banking stocks rebounded following recent underperformance. The Sensex in India briefly came within a stone’s throw of the lifetime high of 21,206.8 before slipping 1 per cent to 20,477.

Follow the market comments of Jamie Chisholm in London and Telis Demos in New York on Twitter: @JamieAChisholm and @telisdemos





Chinese imports widen US trade gap
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: October 14 2010 14:35 | Last updated: October 14 2010 15:01
http://www.ft.com/cms/s/0/7de9cd94-d78c-11df-8582-00144feabdc0.html


A record surge in Chinese imports widened the US trade gap in August, threatening to increase tension between the two countries amid the escalating row about China’s currency policy.

Separate reports on Thursday showed a bigger than expected rise in jobless claims and faster inflation due to a jump in food prices. Persistent weakness in the labour market could raise chances that the Federal Reserve will engage in another round of quantitative easing in an effort to boost employment.

The trade deficit widened by 8.7 per cent to $46.3bn, commerce department figures showed on Thursday. That was the second highest shortfall of the year and exceeded economists’ expectations as US businesses stocked up on consumer goods and cars at the end of summer.

Exports ticked up by 0.22 per cent to $153.8bn, the highest level in two years, but where outstripped by imports, which jumped by 2.1 per cent to $200.2bn.

“The structural US trade deficit continues to persist on the lack of Chinese demand for US exports,” said Michael Woolfolk, analyst, BNY Mellon Global Markets.

Economists expect imports to the US to cool as the end of the year approaches because consumer demand remains tepid. Ian Shepherdson, chief US economist at High Frequency Economics notes that much of the expansion of the deficit in August was due to rising oil prices and a drop in aircraft orders.

In August, imports from China rose by 6.1 per cent to a record $35.3bn. That left US trade shortfall with its most politically sensitive trading partner at a record $28bn at a time when the US is intensifying its scrutiny of China for creating trade imbalances by undervaluing the renminbi.

The US deficit with China accounts for about half of its shortfall with the rest of the world. US deficits with the European Union, Canada and Japan also widened in August.

Meanwhile, initial jobless claims rose by 13,000 to 462,000, according to the labour department. It was the second week running that new claims for unemployment insurance rose, offering another sign that the labour market is failing to gain momentum.

The number of idle US workers continuing to claim jobless benefits fell, declining 112,000 to 4.4m. That reflects a mix of some workers finding new jobs and other unemployed people seeing their benefits expire.

Separately, September’s producer price index revealed some signs that inflation could be looming. Wholesale prices picked up in September, increasing by 0.4 per cent for the second consecutive month. On the year, wholesale prices have climbed by 4 per cent.

The monthly increase was far faster than Wall Street analysts had predicted and reflected a 1.2 per cent rise in food prices. However, the core producer price index, which strips out volatile swings in food and energy, ticked up by a modest 0.1 per cent in a sign that underlying inflation remains tame.

Prices for goods such as computers and men’s clothing fell, while a 0.5 per cent increase in passenger car prices kept the core PPI in positive territory last month.

“The underlying trend of the core finished goods PPI is benign, and it remains our belief that copious global spare capacity will keep it that way at least in the near-term,” said Joshua Shapiro, chief US economist at MFR.





JPMorgan fails to ease investors’ anxiety
By Francesco Guerrera and Justin Baer in New York
Copyright The Financial Times Limited 2010
Published: October 13 2010 22:17 | Last updated: October 13 2010 22:17
http://www.ft.com/cms/s/0/fb504f62-d70d-11df-9cd5-00144feabdc0.html


Investors who dialled into Wednesday’s conference call to discuss JPMorgan Chase’s better-than-expec ted third-quarter results were treated to a vintage performance by Jamie Dimon.

Switching between annoyance at one analyst’s use of a “squawk box” to terse replies on JPMorgan’s soaring reserves against litigation and passionate perorations about the bank’s role in society, Mr Dimon displayed his customary forthrightness even if he was not always forthcoming about some of the details.

Yet, the chief executive’s virtuoso turn – and his hint that JPMorgan’s dividend could finally rise in the first quarter of 2011 – did little to ease investors’ anxiety at a mixed set of results and the regulatory uncertainty gripping the financial industry.

Shares in JPMorgan were slightly lower in late morning trading in New York even though its earnings, which opened the third-quarter reporting season for US banks, beat both analysts’ expectations and results a year earlier.

In the three months to September, the bank reported net income of $4.4bn, compared with $3.6bn in the same period in 2009. Earnings per share were $1.01, 23 per cent higher than the $0.82 recorded last year.

Yet the performance was clouded by a series of items that underlined the state of flux within the banking industry. On the positive side, a $1.5bn reduction in reserve for credit card losses added $0.22 to earnings per share and confirmed that JPMorgan’s card business is on the mend after the crisis.

But that gain was offset by a $1bn rise in the provision for mortgages that JPMorgan might have to buy back as a result of legal disputes with Fannie Mae and Freddie Mac, the government-owned housing finance groups.

JPMorgan’s reserves for mortgage repurchases now stand at $3bn – higher than most competitors – and the bank has said it expects to use about $1bn of them next year. A $1.3bn addition to the litigation reserves – a sign the bank is worried about a swathe of lawsuits on mortgages and other matters – also hit earnings.

Mr Dimon and Doug Braunstein, JPMorgan’s new finance chief, shed little light on the extra reserves.

“So you know our society, right?” Mr Dimon asked, rhetorically, when an analyst quizzed him. “Do you know how many lawsuits go on and class-action suits? It ain’t going away. It’s become the cost of business. We always try to get ahead of it ... when we’re wrong, we’ll settle. When we’re right, we’re going to fight.”

The JPMorgan executives were more talkative when it came to describing the bank’s efforts to maintain the edge it gained over weaker rivals during the crisis.

Mr Dimon said JPMorgan was hiring some 10,000 people in the US this year, mostly in its retail bank, while Mr Braunstein added that the company was investing heavily in infrastructure and people to spearhead international expansion. The result was that expenses rose by nearly $1bn year-on-year to $14.4bn – an issue that could become a concern for the famously cost-conscious Mr Dimon.

Indeed, Mr Dimon indicated that he wanted JPMorgan’s profitability to improve, saying that its 10 per cent return on equity this quarter was still not adequate. In 2007 return on equity was about 12 per cent.

But he expressed confidence that the bank could cope with the regulatory regime being shaped by the US and European authorities without raising new capital. “We have more confidence because we have so much damn capital,” he said.

Mr Dimon also gave investors more insight into when he expected to increase JPMorgan’s dividend. After revealing that regulators are putting US banks through a new battery of “stress tests”, he said that once that process was over, “it’s reasonably hopeful that some time in the first quarter, we can reinstall a dividend”.

JPMorgan slashed its quarterly pay-out in December 2008, to 5 cents a share from 38 cents, as it moved to preserve capital to weather the worst of the financial crisis.

JPMorgan’s share buy-back programme – one of the few among US banks – got into full swing in the third quarter, when the bank bought back $2.2bn of stock. Mr Dimon said JPMorgan “could be an aggressive buyer of its own stock”, especially when the new capital rules become clearer.







Opec leaves production levels unchanged
By David Blair in Vienna and Javier Blas in London
Copyright The Financial Times Limited 2010
Published: October 14 2010 12:46 | Last updated: October 14 2010 15:00
http://www.ft.com/cms/s/0/d5d3d142-d77f-11df-8582-00144feabdc0.html


The Opec oil cartel agreed to maintain its current production level on Thursday, signalling the group’s satisfaction with prices of around $70 to $85 a barrel.

The cartel, which controls 40 per cent of the world’s oil production, said in a statement after a regular meeting in Vienna that whilst economic recovery was under way, “there is still considerable concern about the magnitude and pace of this recovery.”

Opec added that oil market fundamentals remained “weak” and said that refinery utilisation rates, a measure of demand for products such as petrol, heating oil or jet fuel, was low. “Product inventories have risen considerably,” it said. “The market remains well supplied,” it said, noting “downside risk to world economic recovery.”

Opec said it would meet again in December 2010 in Quito, Ecuador. Analysts and traders do not anticipate the group to adjust its official production level until at least the second half of next year, when it would be clearer the pace of the recovery.

Oil has traded within a narrow band of $70-$80 a barrel for the past year, which some Opec’s members, including the group’s de facto leader Saudi Arabia, favour. Others, including Venezuela and Algeria, have expressed their desire for slightly higher prices.

US oil futures on Thursday were little changed after Opec announced its decision. West Texas Intermediate oil, the benchmark, rose two cents to $83.04 a barrel.

Opec’s decision came after the world’s largest oil traders said that oil prices would rise modestly in 2011 towards $85 a barrel, despite market expectations that they will return to above $100 a barrel soon.

Ian Taylor, chief executive of Switzerland-based Vitol, said a price band between $70 and $85 a barrel was “widely viewed as meeting producers’ needs while being simultaneously ‘acceptable’ to consumers”.

“We see prices progressing to the higher end of this range over 2011,” he writes in the Financial Times. But he warned that surpluses in production and refining capacity would keep prices “in a relatively narrow band” next year. “The concept of a price ceiling exists today in a way that it simply didn’t when prices rose to $150 in the middle of 2008.”

Abdullah al-Badri, Opec’s secretary-general, told reporters in a press conference that the oil cartel was concerned about the fate of the US dollar. “Opec ministers are concerned about the dollar situation. It’s not just us, the whole world is watching.”

In the past, Opec minister have justified the need for higher oil prices when the US dollar weakens against the euro and other major currencies. A weaker dollar erodes the purchasing power of oil, increasing Opec’s members import costs.

Wilson Pastor-Morris, the Ecuadorean natural resources minister and current president of the oil cartel, said the present quotas, agreed during a meeting in December 2008, had “served [their] purpose well” and “reduced volatility at a critical time for the world economy”. The present agreement allows the 11 Opec members subject to quotas to produce 24.85m b/d. In practice, they pump some 26.8m b/d. Iraq, the 12th member of the cartel and not covered by quotas, produces another 2.4m b/d.





German economic recovery to slow next year
By Quentin Peel in Berlin
Copyright The Financial Times Limited 2010
Published: October 14 2010 14:51 | Last updated: October 14 2010 14:51
http://www.ft.com/cms/s/0/f4b74b6a-d794-11df-8582-00144feabdc0.html


Germany’s economic recovery is set to slow from 3.5 per cent growth in the current year to 2 per cent in 2011, according to the latest six-monthly forecast from Germany’s leading economic research institutes.

In spite of the slowdown, unemployment is expected to fall below the psychologically important level of 3m next year, they say, while a revival in domestic demand will cushion a slowdown in exports that have been the principal driver of the recovery.

The authors warned that their latest forecasts must be considered in the light of “substantial risks”. They said that “the likelihood of the US falling back into recession” was not “insignificant,” while a bubble in the Chinese property market could result in a “massive correction”.

“The recovery of exports is diminishing perceptibly,” the institutes said. Investment in both manufacturing equipment and construction was likely to lose momentum. But they forecast a turning point in private consumption, after years of relative stagnation.

The cautiously optimistic conclusions of the eight institutes – six based in Germany, one in Austria and one in Switzerland – are likely to be used by the German government as proof that the largest economy in the eurozone is playing its part as the engine of economic recovery, even as other members such as Greece, Ireland and Spain are forced to implement drastic austerity measures.

The autumn report, submitted to the German economics ministry on Thursday, reflects the sharp increase in economic activity in the first half of 2010, largely driven by exports. The institutes’ April forecast for GDP growth for the current year was 1.5 per cent, falling to 1.4 per cent in 2011.

The slowdown next year is expected to flow from the falling growth rate in the US and in the emerging economies, including China, that are Germany’s principal export markets.

If the forecast proves correct, and it is in line with the German government’s own conclusions, the unemployment rate will be the lowest since 1992, shortly after German unification saw the loss of tens of thousands of jobs in the former communist East Germany.

Prof Kai Carstensen, of the Munich-based Ifo institute, said that the remarkable recovery of German employment levels included many temporary as well as permanent jobs, suggesting increasing flexibility in the labour market. The number of low-paid “mini-jobs” created in the revival was actually falling, he said.